Where to start. We can first take notice of how froth has been consistently out of control for roughly sixty consecutive weeks save two of them. Only two of them have had bull-bear spreads of under 30%. That was last October when we were correcting. Most of the time we have been above the dangerous level of 35%. We have also spent, I believe, at least ten weeks over 40%. We are at 42.5% coming in to this week. That's completely out of control. You can pretend to deny it, or even ignore it, but it's not going away just because you're bullish and wish it weren't so.
Due to the actions of our leader, Fed Yellen, the market has found a way to hold up under this tremendous froth longer than anyone could have thought humanly possible. I, for sure, never thought it possible. The most we have corrected from this type of froth is 9.9% on the S&P 500 last year and that loss was taken back very quickly once things calmed down just a bit. The desire to be involved in the market overwhelmed every attempt by the bears. We still don't know, even at 42.5% on the spread, if the froth is actually kicking in for real. Maybe this is nothing more than a simple pullback before trying higher again. It doesn't seem that way to me, but, hey, what do I know! The marker reacted in a way today consistent with froth finally starting to make some noise. I'll discuss more of that below. Today was not a good day for the bulls for many reasons, but, to me, froth was the biggest catalyst to the move lower.
So what happened today that is really bad for the bulls? We turn our attention to the charts of the transport, biotech, semiconductor, and bank-sector charts. All of them with gap downs, and all of them losing, in unison, their 50-day exponential moving averages on those key-daily charts. The 20's on the bios. The first time in a very long time that we have seen that type of behavior. A total change of trend not seen in quite some time, and whenever you have a change of trend of this magnitude, you better take notice.
Each one of those sector charts have been strong. If one gets sold the market turned its attention to the other sectors to make up the difference. The market found a way to rotate the cash around and keep market prices higher. Today we did not see rotation, and that, too, is a massive change of trend. This is the first time the bulls could not find a way to get a key, leading sector to rise when they needed it to. They lost their hold on the process of rotation. A first. A portent of things to come? Not sure, but definitely worth noticing. If those sectors don't immediately come back, and take those lost 50's back, things could get ugly very quickly. Four of the key, leading sectors and none of them could stop the bleeding today. Respect it for the potential message that reality may be sending.
Lessons taught. The market is famous for doing this over and over. Wash, rinse, and repeat this process for what seems like forever. New traders come in and enjoy the fruits of getting involved to some degree with the froth. Over time the stocks run higher and higher and those traders can't take it any longer. The need to get fully involved is overwhelming. Emotion kicks in and they run in to these stocks with everything they have. In this case, those biotechnology stocks, the bubble of this bull market and the allure of what was possible, is just too much fun to not get involved. And as usual, you can't make the following reality up. Biogen Idec Inc. (NASDAQ:BIIB), the biggest froth of them all, had its largest volume up-day ever on Friday. The stock was up tremendously prior, and the emotion was just too high for traders to ignore.
The same day, the index ETF iShares Nasdaq Biotechnology (NASDAQ:IBB) had its largest volume of the year and it, too, has been slaughtered ever since. I can name many more in that sector but the list is too long. Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX), Kite Pharma (NASDAQ:KITE), Bluebird Bio (NASDAQ:BLUE), Esperion Therapeutics (NASDAQ:ESPR) and many others also culprits of froth. The full list is over thirty long. The carnage too intense to take for most. Some even showing distribution volume off the top. Vertex Pharmaceuticals (NASDAQ:VRTX) for example. These stocks will recover some and have great rallies but the technical damage is in. They should struggle for some time to come in between those quick, strong rallies. The market, in the biggest bubble of this bull, takes out the masses once again. Wash, rinse, and repeat.
The monthly charts have negative divergences. They also have very elevated oscillators. That combination, over time, usually plays out to the down side, but, of course, timing that is never easy when you have such a protective Fed Governor. Her actions regarding rates are keeping folks involved when one would think it's impossible. The daily chart on the Nasdaq has joined the party regarding negative divergence. Again, there's no way to know if, and when, it'll kick in, but it's there, and needs to be respected. If it plays out, things could get somewhat ugly for a while. The point, of course, being that nothing is easy for the market here when you add up the potential negatives.
Ms Yellen keeps trying. Maybe she’ll get away with it a while longer, but there are enough problems to keep me thinking cash is great. If you want some scratch after today's poor action that's up to you. To me, extreme caution is warranted. That said, and this is very critical for the bears. Stop with the excuses. You have everything on your side. You couldn't ask for more positives. The market needs to stop the rally-moves higher every time we have a decent down day. The bears need a thrust lower. No more excuses. Keep the markets oversold the way the bulls keep them overbought. Can't rally hard every time any key, time-frame charts hits 30 RSI. The bears have their chance. Time to seize the opportunity and thrust this market lower. We shall see what they can do.